Forming and Refining Trade Ideas – Revisiting the Aussie Kiwi Trade
Thoughts on the Market by Andy Krieger
July 20, 2026
On May 28, 2026, about six weeks ago, I sent out a special report recommending a short position in the Australian dollar versus the New Zealand dollar. The currency pair was trading at 1.2080 that day, having reversed from its multi-year high at 1.2285, which was established two days before I sent out the report. Because it will provide a deeper insight into the sort of thought process that goes into my trades, today’s newsletter revisits this idea and explores this trade recommendation in some depth. Please understand that I have neither a magic formula that I apply in my trading, nor a “one size fits all” strategy that goes into my ideas. Instead, each idea is predicated on a number of basic principles.
Let’s dig in.
First, let me start with a little retrospective, a journey down memory lane. Unless you’re somehow blessed (or perhaps cursed) with perfected precognitive abilities, I’m sure that all of you have had varying degrees of success in your trading. I feel lucky to have had the pleasure of working alongside – and being friends with – quite a few of the very best traders in the world over the past forty years. You can read about many of these traders in Jack Schwager’s “Market Wizards” series, although a few of us (myself included) declined the offer to work with Jack as we felt that we had already received more than our share of publicity.
These traders all had very different styles of trading. Some focused on foreign exchange, some focused on commodities, some were experts in options, some never traded options at all. Some were trend followers, some were counter-trend traders. Some loved to sell options naked, and some loved to buy options. The personalities and backgrounds of these traders were as varied as their trading strategies. It was a fascinating experience getting to know each and every one of them, and it was eye-opening for me to get a first-hand peek inside the minds of brilliant people who all had the inner strength to accomplish great things against great odds. I am very grateful for the experience, and I am particularly grateful for the chance to call some of them my friends.
So where am I going with this? For those of you who know me well, you are likely familiar with the fact that I never actually wanted to have a career in trading and finance. I wanted to be a professor of Indian philosophy and write books about Indian mysticism, with a particular focus on comparative studies with other major mystical traditions. In pursuit of this career, I studied many languages: Sanskrit, Bengali, Arabic, Hebrew, and a bunch of modern languages. I had zero interest in business or finance, and I was fortunate to live in a sort of academic bubble in which all of my studies were funded by university scholarships and obscure government grants for the study of neglected languages. (Yes, that is right. The Department of Defense funded some of my weird studies, so they can technically call me at any time to serve and provide some sort of theoretical expertise in the languages and cultures that I studied. Hopefully, they’re not counting on me remembering those languages, as it would make me very, very nervous about our nation’s ability to defend herself!)
Do you can imagine my shock when my graduate advisor and mentor informed me that although my four years of graduate work were first rate, I would likely only get a job when he or -- one of the other few professors in the field -- died. Ugh! What a rude awakening! I thought he was joking at first, but he was completely serious and said he felt obligated to bring it up because he knew that I was married and recently had a son.
After a moment of brief panic, this advisor suggested that switching from my PhD program to an MBA at Wharton would probably be the safest path to support my family. He agreed to continue funding my studies as long as I kept up my Sanskrit and Bengali studies, so I entered the crazy world of finance with zero work experience -- except for a brief stint as a professional tennis player and sometime public court hustler. I hadn’t taken a math course since high school, and I had no practical background in statistics. Talk about a fish out of water!
I had no idea what courses to take or what area of studies to focus on, so I pretended that my work in languages was part of my preparation for a career in international finance. Considering the languages I was focused on, it was an absolutely ludicrous idea, but I stuck with it, took a couple of courses in finance, and met a brilliant professor named Orlin Grabbe. We became friends, and he challenged me to write a currency option pricing model. Because I was too idiotic to know I should have declined, I accepted the challenge, despite a few glaring limitations: 1. I knew nothing about currencies; 2. I had no idea how to program anything; 3. My math skills were beyond rusty – they were in hibernation.
Somehow, I wrote the program, and it even worked, using a binomial pricing model. And since I had just written the first currency option pricing model, I decided to go all-in on foreign exchange to see where it took me. I understood options, but I still had zero experience in trading, In reality, I was so new to the field that I really had no idea how much I didn’t know.
Once I shaved my very bushy beard (it was the 1970’s, and I was a philosophy student, after all) I ended up getting a job at Salomon Brothers, working with Bill Lipschutz, a very talented trader who loved options but used them very differently from me. In fact, we often traded back and forth with each other, creating huge synthetic positions in our portfolios which theoretically should not have worked – but somehow did. I was generally a buyer of options, and he was generally a seller. We managed our positions differently, but we both ended up making a lot of money.
Bill’s strategies were based on pragmatic assessments of market risk, betting that the market would behave generally in predictable ways. Put more simplistically, Bill believed in following trends, but he typically bet that fat-tailed events would occur very rarely, so it would be safe to sell options – naked and otherwise. My portfolio was typically structured very differently. I might sell at-the-money options, but I would almost always be long huge amounts of junky, out-of-the-money options. Of course, this is an over-simplification of what we were doing, but I loved wild markets -- the wilder the better! Underlying my trading was a basic philosophy that we only have limited knowledge about future events, so I wanted to make sure that if we experience massive surprises, I would not only be alright, but I would flourish.
Because I typically had a lot of time decay that I need to offset in my book, much of my P&L was generated by being a very active trader in the spot and futures markets. This led to a tremendous amount of short-term trading as my time decay could be quite massive sometimes. What does this mean in plain and simple language? It means that I owned billions of dollars of options that were decaying and losing value over time, so I needed to make a lot of money with my spot trading to finance that time decay. What enabled me to relax was knowing that any sort of chaotic event would yield gigantic gains for my portfolio.
Quiet markets were great for Bill Lipschutz. They were very challenging for me. Somehow it all worked because I was able to trade the underlying markets well enough to more than offset the time decay of my options portfolio. Sometimes I would take very large directional bets, expecting the market to break in one direction or another, but I almost always used option spread trades or even simple option purchases to express my view. The options gave me the chance to stay calm because I could fix my downside risk and not have to worry about getting stopped out of a good position. I had seen the spot traders on our desk (and at various banks) get stopped out of positions repeatedly as the market gyrated around before finally going in the direction they initially expected, Unfortunately, they often missed the big move because after suffering a number of losses, they lost their nerve. Their chief problem? They were too early.
I also lost some money if I was way too early, but my downside was fixed and predetermined, which helped me stay calm and quite objective about the developing market action. Because my biggest ideas were anticipatory, I knew that I might be early. I was forecasting moves before they had evolved into obvious trends, so I typically bought options that matured a few months later than when I expected the move to take place. If I waited for the moves to develop, then the options would often become too expensive for me to structure the risk-reward that I wanted.
During my initial years of trading, I didn’t look at charts or rely on technicals. I didn’t use Fibonacci’s, moving averages, or any of the more common technical components I later learned to implement. All of my spot trading was based on certain simple rules related to levels of supply and demand. I was sufficiently active in the market with my hedging that I was able to determine levels of significant supply and demand from my hedging activity. It was a simple calculus: if, for example, I was trying to sell dollars at a certain level, but the market kept failing to reach that level, then I could easily deduce there were stacks of sell orders in front of my level. I would then happily shift my orders to the sell zone – or slightly below it -- just to make sure that I got filled. This information was very valuable, and it came at almost no cost. In fact, some of my biggest trades have relied on this very simple methodology.
I also quickly learned that the market had a remarkable ability to punish traders to inflict maximum levels of pain. Therefore, part of my daily job included canvassing traders at banks around the world: when there was an overwhelming unanimity of opinion, I would get very interested in taking the other side of that widely held view. This very simple logic works beautifully over time -- as long as you have rigorous stop-loss discipline and iron clad risk management in place. I knew from my studies that markets can become overextended to insane levels. In fact, I had observed that a bubble could continue to levels that could bankrupt undisciplined speculators, so I continued to use limited risk option strategies when I played for major reversals.
Essentially, I developed a basic system for trading which enabled me to rely on certain identifiable characteristics: market sentiment and levels of supply and demand. These two factors alone were enough for me to formulate a trading strategy. I knew that risk management had to be sound and I always pre-determined the amount of money I was willing to lose on any idea.
There were other key indicators I could count on to be remarkably reliable. For example, when a market experienced an extraordinarily long period of compression – which I was well aware of, because implied option volatilities would be unusually low – I knew that without fail, the period of market compression would be followed by a period of extreme volatility. I had also observed that after a market gapped higher or lower from certain levels, it would almost invariably return to retest the gap.
One of my favorite rules was also a basic theory that markets were always seeking some sort of balance or equilibrium. Therefore, I always expected parabolic moves to have significant reversals off of spike tops and bottoms. I hope you’re following my logic, because it’s the same logic that enabled me to generate massive profits in my trading since the 1980’s and ever since. I had no preconceived notions, so I was constantly trying to make sense of the chaos of speculative market action.
Later, I started refining some of my basic observations and adding some technical tools to my trading strategies, but I have always relied on things that I know – things that are measurable and verifiable. Whether those things were wide canvassing of traders and investors to gauge their sentiment or mathematically observing significant periods of compression or perhaps measuring the slope of a move to know that its advance or decline was unsustainable. The underlying key was having rigid and inviolable risk management rules in place that allowed me to be wrong repeatedly … but with acceptable losses.
I could happily ramble on and on about these things, but let me return to the AUD/NZD trade. What attracted my interest and inspired me to put on a structural short position in something that can be a bit boring and move quite slowly?
Let’s look at the chart more closely, because it’s actually surprisingly interesting. After having a fierce sell-off from the highs of 2011 around 1.38, the cross proceeded to bottom just below par. It tried to break below par repeatedly for six years before finally having a major recovery. Overall, the cross traded in a wide band between par and 1.15 – with most of the action between 1.03 and 1.13. Finally, in 2025, Aussie exploded higher before running into significant selling pressure just below 1.2200 in March of 2026. It tried again to accelerate higher in April of 2026 before running into selling around the 1.2250 level. Finally, on May 26, the cross failed yet again to take out the 1.2300 level – which happens to be within just a few pips of the 61.8% Fibonacci retracement level of the entire decline from 1.3800 in March of 2011.
If a market stops “coincidentally” very close to a major Fibonacci corrective level following a decline that ran out of steam after nine years, I am getting very interested. I was already very interested in the cross back in 2011 because the market “coincidentally” stopped rallying almost exactly where it had previously failed back in August of 2000 – and I don’t believe in coincidences when it comes to markets. I believe that markets have memories and that multi-year highs and lows need to be carefully watched for guidance. I also believe that Fibonacci retracement levels that take many years to reach – plus or minus one half a percent – need to be heavily respected as well. Short-term Fibonacci levels are often worth ignoring.
Was that enough to get me to sell? It could have been, but I also love to see some very obvious technical indicators such as obvious divergences between market movement and momentum indicators.
In this case, the bearish divergences from the weekly charts were screaming at me to sell. The market was making new highs as the momentum indicator was trending sharply lower. Was that enough to trigger a sale? Almost, but I also did a deep dive into the macro fundamentals. It was patently obvious that the RBNZ would have to raise interest rates sharply, and it was equally obvious that a sharp convergence in interest rates between Australia and New Zealand was not priced into the market.
Accordingly, I went short and suggested that this was likely an excellent risk-reward trade. Is it a guaranteed winner? Of course not. From my original entry, the trade is working fine. It will likely grind lower quite slowly, but I see it heading down to at least the 1.1500 level. Potentially it will go much further than that, but for me 1.1500 would be enough for now. As of this writing, the cross is trading at 1.1965, continuing to grind lower -- as expected. I still like the trade, and everything is developing as expected, but I like to take trades one step at a time. There’s plenty of room left in this trade, so I am happy to run it for now. At some point, I might choose to cover half of my position and then move my stop to breakeven … but not yet.
In any event, I hope you have found this instructive; it should give you a very clear idea of the process which I go through when I start to form my market views and then refine my trade ideas. More importantly, I hope that this example can help you form your own ideas so that you can make lots of money with your trades. There are many trades setting up right now that look very interesting, so it is a particularly fruitful time to focus on finding profitable opportunities. Whether I look at commodities, stock indices, currencies, or even fixed income markets, we are getting set for some fantastic trades.
In the meanwhile, I want to wish you all the very best of luck with your trading.
Andy Krieger
This report is provided for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Past performance is not indicative of future results. Please consult your advisor before making investment decisions.